How To Write Covered Calls - An Ongoing Real Case Study! Message Board

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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!

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To: Rupert Gittens who wrote (8465)	9/2/1998 12:45:00 PM
From: Herm	Read Replies (2) of 14162

Hi Rupert, WHAT IS A BEAR TRAP? The term bulls and bears has come to be known in the stock market jargon as investors that: BULLs - Think the market (or stock) is moving up in value. BEARs - Think the market (or stock) is moving down in value. Therefore, if one is setting "bear traps" we are basically saying that we have or will be employing trading strategies that will allow us to profit from a downward stock or market downward move. The bear trap could be a short or long term in duration. We take advantage of the conditions of the market and/or stock by anticipating the downward moves by knowing the fundamental (P/E value, earnings per share, growth rates) and the charting technical indicators such as the Relative Strength Indicator (RSI) and Bollinger Bands for the extreme pivot points in stock price movements. REVIEW OF THE W.I.N.S.(c) PROCESS: The basic approach to W.I.N.S. is the following. W=price withdrawing I=price increasing N=neutral to sideways S=sideshow counter actions 1. W - When the price is peaking (price touches upper BB and high RSI) and on the verge of (W)ITHDRAWING: a. Sell CCs at or in the money! (Bread and Butter) b. Buy cheap PUTs and/or short the stock! (sideshow) c. Cash in long calls! (sideshow) 2. I - When the price is bottoming (price touches lower BB and low RSI) and on the verge of recovery and the price is (I)ncreasing: a. Cover your CCs! (Bread and Butter) b. Buy long calls!(sideshow) c. Sell in the money PUTs! (sideshow) d. Buy cheap warrants if offered (sideshow) Warrants over $5.00 can be purchased on margin! 3. N - When the price is moving sideways, do nothing but watch! a. Watch the upward/down slope of RSI! Hint - RSI will give you a small lead in the direction of the stock price. b. Watch the earnings dates, options expiration dates, and the closest strike price. Note - Most MM shakeouts come the week before options expiration week. c. Watch for split announcements or mergers. 4. S - Sideshows is applying the use of PUTs and CALLs as actions to get more juice or profits at specific times! The best sideshows are realized when the PUTs or CALLs are purchased real cheap and with your CCer's premie $ dollars. a. When CCing if the stock gaps up and you determine that the market conditions warrants prompt action, you can buy a load of ATM CALLs to catch the action rather than covering your CC at a lost and rolling up a strike price in order to recover. Experience has burned me too many times with that! I rather make up the profit difference with the sideshow calls. I can trade the calls and cash out faster and have the odds in my favor. b. Recovery spreads involve the act of selling higher strike prices for the premie $ dollars. The premie dollars are used to buy deep in the money sideshow calls on the same stock as the CCs. So, the premie dollars offset the majority of the cost of the sideshow calls. The net result (if the stock moves up as expected) is a lower breakeven point (because of the increased value of the sideshow calls) and a higher strike price for the CCs (if exercised). When combined it will get you out of the hole faster and with little or no additional dollars out of your pocket. c. Bear traps are sideshows using the PUTs or actually shorting the stock when the PUTs open interest is very low. Again! CC dollars would be nice to use. When you have more than two stocks there are times when one is moving sideways and the stock may be going down. Using the CC dollars to buy PUTs on the other is a wise use of capital and is an excellent hedge against loses. SUMMARY: Sell (write) CALLs - Buy PUTs Buy CALLs - Sell (write)PUT

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